The Real Exchange Rate, Exports, and Manufacturing Profits: A Theoreti- Cal Framework with Some Empirical Support

23 Pages Posted: 29 Oct 2000 Last revised: 2 Dec 2022

See all articles by Richard Clarida

Richard Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco; National Bureau of Economic Research (NBER)

Date Written: August 1991

Abstract

This paper investigates the relationship between manufacturing profits, exports, and the real exchange rate. Using Harston's (1990) model of pricing-to-market, we derive a co-integrated log-linear profits equation that restricts the long-run relationship among real U.S. manufacturing profits, domestic sales, the real exchange rate, real unit costs, the U.S. relative price of output, and foreign sales. We show that the elasticity of real profits with respect to the real exchange rate is bounded below by the product of (i) 1 minus the long-run pass-through coefficient and (ii) the ratio of export revenues to total profits. Our empirical findings suggest that, even after taking into account output, costs, and relative prices, real exchange rate fluctuations have a sizable and statistically significant influence on real U.S. manufacturing profits. The framework developed in this paper appears to be of some value in directing attention towards a heretofore underappreciated channel through which real exchange rate changes can potentially influence national savings.

Suggested Citation

Clarida, Richard H., The Real Exchange Rate, Exports, and Manufacturing Profits: A Theoreti- Cal Framework with Some Empirical Support (August 1991). NBER Working Paper No. w3811, Available at SSRN: https://ssrn.com/abstract=233718

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